Chapter 14: Internal Control and Auditing
14.1 Internal Control System
Meaning and Concept
Internal Control is the comprehensive system of organizational plans, administrative procedures, division of duties, internal checks, budgetary controls, and asset safeguards established by the management or Head of Office within an organization to conduct daily operations smoothly, prevent errors and fraud, safeguard assets, and ensure compliance with prevailing laws and policies.
- Under Nepal’s Financial Procedures and Fiscal Accountability Act, 2076, every government ministry and office must prepare and implement an Internal Control Guideline suited to the nature of its work.
Objectives and Importance of Internal Control
- Prevention of Errors, Fraud, and Irregularities: Through segregation of duties (e.g., the person who purchases goods is separate from the storekeeper who verifies Dakhila and the accountant who makes payment), no single individual can commit fraud easily.
- Safeguarding Public and Business Assets: Protects cash, bank balances, inventory, and fixed assets against theft, waste, and unauthorized use.
- Accuracy and Reliability of Accounting Records: Ensures that every voucher is supported by valid bills, receipts, and approvals before entry.
- Compliance with Laws and Budget Limits: Guarantees that all financial transactions strictly follow the Public Procurement Act, Tax Laws, and approved budget ceilings.
- Operational Efficiency and Accountability: Fixes clear responsibility on each employee for their assigned task.
14.2 Auditing: Concept, Objectives, and Types
Meaning of Auditing
The word Audit is derived from the Latin word “Audire”, which means “to hear”.
- Definition: Auditing is the independent, systematic, and critical examination of the books of accounts, vouchers, supporting documents, store records, and financial statements of an organization by a qualified and authorized auditor to verify their regularity, economy, efficiency, effectiveness, and propriety, and to express an official audit opinion/report.
- In Nepal, auditing standards (Nepal Standards on Auditing - NSAs) are developed by the Auditing Standards Board (AuSB), Nepal and regulated by ICAN for the corporate sector, while public sector audit is governed by the Audit Act, 2075 under the Office of the Auditor General (OAG).
Types of Audit in Government Accounting: Internal Audit vs. Final (External) Audit
In Nepal’s government accounting system, every office undergoes two stages of audit:
1. Internal Audit
- Meaning: A periodic examination of the accounts, vouchers, revenue, expenditure, store, and retention records of an operating government office conducted during the fiscal year (monthly/quarterly) by an internal agency within the executive branch to detect and correct errors before the Final Audit.
- Who Conducts Internal Audit in Nepal?:
- For Federal Government Offices: Conducted by the District Treasury Comptroller Office (DTCO) under the Financial Comptroller General Office (FCGO).
- For Provincial Government Offices: Conducted by the Province Treasury Comptroller Office (PTCO).
- For Local Levels: Conducted by the Internal Audit Section of the respective Rural Municipality or Municipality.
2. Final / External / Statutory Audit
- Meaning: The constitutional and independent examination of the annual financial statements and accounts of all government offices, constitutional bodies, and state-owned enterprises conducted after the completion of the fiscal year by the supreme audit institution of the nation.
- Who Conducts Final Audit in Nepal?: Exclusively conducted by the Office of the Auditor General (OAG) under Article 241 of the Constitution of Nepal, considering Five Pillars: Regularity, Economy, Efficiency, Effectiveness, and Propriety.
Differences Between Internal Audit and Final (External) Audit
| Basis of Difference | Internal Audit | Final / External Audit |
|---|---|---|
| 1. Auditing Authority | Conducted by DTCO / PTCO (under FCGO / Executive branch) for government offices, or an internal auditor in businesses. | Conducted by the constitutional Office of the Auditor General (OAG) for government offices, or an independent CA/Registered Auditor for companies. |
| 2. Timing of Audit | Continuous / periodic audit conducted during the fiscal year (monthly or quarterly) before final accounts are closed. | Annual audit conducted after the completion of the fiscal year once annual financial statements are prepared. |
| 3. Main Objective | Advisory and corrective; aims to detect errors, omissions, and irregularities early so the office can rectify them before Final Audit. | Evaluative and constitutional; aims to verify truth, fairness, regularity, economy, efficiency, effectiveness, and propriety of public accounts. |
| 4. Submission of Report | Submitted to the Head of the Concerned Office and superior department for internal improvement and compliance. | Submitted by the Auditor General directly to the President of Nepal (and placed before the Federal Parliament / Public Accounts Committee). |
| 5. Independence | Performed by an agency within the government administration (less independent than OAG). | Completely independent constitutional body free from executive interference. |
14.3 Audit Irregularities / Beruju and Its Settlement
Meaning of Beruju
According to Section 2(t) of the Financial Procedures and Fiscal Accountability Act, 2076, Beruju (Audit Irregularity) refers to any financial transaction pointed out by the auditor during an audit as being carried out contrary to prevailing laws, without maintaining required supporting documents/accounts, in an irregular or unreasonable manner, or advances remaining unsettled.
Classification of Beruju
When the Office of the Auditor General conducts the Final Audit, all identified Beruju is classified into three official categories:
- Recoverable Beruju: Irregularities involving overpayment, embezzlement, revenue leakage, or payment made without actual delivery of goods/work, where the exact sum of money must be recovered in cash from the concerned official or contractor and deposited into the Consolidated Fund (Revenue Code 15111).
- Beruju to be Regularized / Adjusted: Transactions where the work was genuinely performed and money was not misappropriated, but procedural formalities, bills/receipts, or approvals were incomplete:
- Unreasonable/Improper: Procedural rule was bypassed (needs superior/parliamentary regularization).
- Unsupported by Documents: Missing bill, receipt, or Dakhila report (cleared by submitting the missing proof).
- Responsibility Not Taken: Uncarried balance to next year’s books.
- Reimbursement Not Taken: Foreign aid/grant spent but reimbursement not yet claimed.
- Unsettled Advance Beruju: Advances given to employees, contractors, institutions, or Letters of Credit (LC) that have not been cleared within the legal deadline by the end of the fiscal year.
Procedure for Settlement of Beruju
- Upon receiving the preliminary audit report, the Accounting Officer / Secretary and Head of Office must take action to recover recoverable amounts, submit missing documents, or clear advances within 35 days (and submit responses to OAG).
- Final audit reports are reviewed by the Public Accounts Committee (PAC) of the Federal/Provincial Parliament.
14.4 CDC Textbook Exercises & SEE Practice Questions
Group A: Very Short Answer Questions (1 Mark Each)
- What is Internal Control?
- From which Latin word is the term ‘Audit’ derived and what does it mean?
- Who conducts the Internal Audit and Final Audit of Federal Government offices in Nepal?
- What is Beruju (Audit Irregularity)?
Group B & C: Short and Long Answer Questions (5 & 8 Marks)
- What is Auditing? Explain any four objectives/advantages of Auditing. (5 Marks)
- Differentiate between Internal Audit and Final (External) Audit in five points. (5 Marks)
- What is Beruju? Explain the three main classifications of Beruju in Nepal’s government accounting system and how Beruju can be minimized. (8 Marks)
Worked answers to these exercises are in Chapter 14 Solutions.